Over the last few months, Europe seemed to be proving its doubters wrong. Thanks to a timely intervention by European Central Bank President Mario Draghi in mid-2012, yields on Spanish and Italian bonds, which had been spiking towards levels that threatened to topple them into costly bailouts, had receded to more tolerable levels and calm was restored to jittery financial markets. The European Union crept towards the greater integration that is the only true route out of the debt crisis by agreeing to form a banking union in December. The leaders of the euro zone and Greece managed to patch up their differences enough to keep the country in the monetary union. Reforms in troubled economies continued, albeit slowly. Spain is steadily repairing its banking sector, laid low by the country’s housing bust, with the help of E.U. aid. Yes, it looked like gloating time for the optimists who had insisted that those who predicted a much more dismal outcome of the euro zone’s debt crisis – the exit of one or more of members, or the collapse of the monetary union altogether – were gravely mistaken.

I have to admit that I was one of the naysayers. Many of us warned that without major structural changes to strengthen the monetary union, intensive reforms within euro zone countries and an entirely different approach to tackling the crisis (not just austerity, austerity and more austerity), the debt crisis was impossible to resolve. Had Europe really escaped the jaws of death, without the dramatic reforms so many economists thought were necessary? In recent weeks I was wondering if my analysis had gone badly awry.

The political upheaval in the euro zone’s third-largest economy in the wake of this week’s national election shows us just how troubled the euro zone really is, and how dangerous its debt crisis remains to the global economy.

Preliminary results on Monday showed that no party notched a clear win, with the pre-vote front-runner, Pier Luigi Bersani and his center-left coalition, posting just a few more votes than the right-leaning alliance led by Silvio Berlusconi. Why Italians would vote again for the scandal-ridden Berlusconi, who was booted from the prime minister’s job just over a year ago, is a matter for psychologists, not economists. But from an economic standpoint, the election outcome does not build much confidence in Rome’s ability to push ahead with reforms to spur growth and reduce debt. Neither Bersani, a former communist, or Berlusconi, who was inept in handling Italy’s economic woes during his last term as prime minister, can be counted on to commit to tough labor reforms and budget cutting. And that’s assuming either of them can form a stable government. No party looks likely to emerge from the election with any sort of mandate to push a policy agenda. There is even talk of total gridlock, requiring a whole new election to unlock.

What we do know about the Italian election is that it showed how quickly the euro zone debt crisis can come back to life. Italy’s 10-year bond yields, a measure of how risky investors perceive Rome’s debt to be, began rising again after the messiness of the poll results became clear. Stocks tanked in the U.S. on the news. Italy’s FTSE MIB index was trading 4.99% lower at 15,552 at 11.30am EST Tuesday, when the market closed for the day. The market turmoil tells us how any one event in any of the euro zone’s troubled economies can resurrect jitters over the future of the monetary union.

The election also sends some even more worrying signals. Mario Monti, the outgoing prime minister, and his allies got trounced in the election, polling a dismal fourth. Monti, a former E.U. commissioner, was airlifted into the prime minister’s office in late 2011 to employ his technocratic skill at reforming the economy and averting an Italian meltdown. He managed that with some painful budget cutting and deregulation, and Monti was seen by many in Europe as one of the euro’s chief and most important defenders. His defeat sends a resounding message from Italian voters that they don’t much care for Monti’s euro-saving reforms, which helped topple Italy into a recession. Monti becomes the latest political casualty of the euro crisis. Meanwhile, that same disenchantment with reform is also building support for once-fringe parties. The new Five-Star Movement, which campaigned on an anti-austerity platform, was running a close third in the election results. What all this tells us is that the steps needed to put the euro on firmer ground are too politically unpopular to implement in today’s European democratic politics – a reality usually ignored by Europe’s leaders.

The election results, furthermore, are a signal that, to the people of Europe, the euro zone debt crisis is far, far, far from over. Sure, bond markets may have stabilized, but the ordinary worker is still suffering badly from the crisis. Unemployment in the euro zone stood at an ugly 11.7% in December. In Spain and Greece, the rate is more than 26%. There is no relief in sight. The E.U. expects unemployment to climb even further in 2013. The prospects for growth aren’t any better. Euro zone GDP contracted by 0.5% in 2012 and the E.U. forecasts the zone to suffer another 0.3% decline in 2013. Even core countries like Germany and France will barely grow.

Even though markets may have been sedated – pacified by central bank largesse or promises of largesse — the crisis in the real world has entered a different stage. Perhaps the threat to the survival of the euro has receded (at least temporarily), but now Europe is faced with the daunting task of repairing a fundamentally broken regional economy. How countries like Spain and Greece begin to create jobs again and restart healthy growth is far from clear. Some of the weaker euro zone economies – Spain, Greece, Portugal – are already halfway through a lost decade. Even those economies that are supposed to be stronger – Germany, the Netherlands – are struggling. What I’m afraid of is a Japan-like scenario in Europe, where a financial crisis is not handled forcefully up front, and that stifles growth for years after the worst market turmoil is over.

The reasons Europe is in this mess are the same ones the gloom-and-doom types have been pointing out all along. Europe has no region-wide strategy to spur growth; the banks haven’t been fixed; progress towards integration remains mired in mud; the austerity-obsessed approach to reform is counterproductive. And so on. The political uncertainty in Italy is just the latest manifestation of these problems, and the latest signal of how unresolved the problems are. It won’t be the last.